Even if the EU shuns a free trade deal with us and we move to WTO rules, we’ll still be better off

Even if the EU shuns a free trade deal with us and we move to WTO rules, we’ll still be better off

One of the many misconceptions which abound in the British debate about Brexit is the assumption that the Article 50 negotiations will be primarily about our trading relations with the rest of the EU. Although most British commentators assume that to be the case, on the continent the prevailing view is that Article 50 is about the ‘divorce settlement’. Any negotiations about trade relationships will, in this view, come after the Article 50 negotiations are complete.

What does the ‘divorce settlement’ involve? As always it is about money – who gets the house and who pays the mortgage – or in this case who owns the assets (the famous wine cellar and, more important, the buildings) and who is liable for ongoing liabilities like pensions of EU staff, unfunded commitments and future programmes agreed when there were 28 of us. Doubtless the more optimistic continental politicians hope that we may even be liable to pay ‘alimony’ – keep paying our net contribution after we leave – at least for a time. On top of this there is an array of ‘housekeeping’ items which have to be sorted out like ongoing security co-operation, open skies, etc. in which both sides have a strong interest to agree but which require some formal agreement.

The authors of Article 50 were probably thinking primarily of these divorce issues when they drafted it, though few expected it ever to be invoked. Nonetheless, the way it is worded gives the UK a strong lever to insist on early consideration of our future trading arrangements. Article 50 clearly states that “the Union shall negotiate and conclude an agreement with [the leaving] State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union” [emphasis added]. It is manifestly impossible to “take account of the framework for [our] future relationship with the Union” unless we first agree at least in outline what that framework will be and virtually impossible to imagine a framework which does not include our mutual trading relationship. As far as I am aware not even the most fervent Europhile has come up with any alternative interpretation. I happily award a bottle of Champagne to anyone who can find a persuasive interpretation that does not require a need for agreement on the framework before the negotiations can be undertaken, let alone concluded.

Timing will be as important as substance in our negotiations. So we should begin by insisting that the negotiations respect the need to reach agreement on at least the outline of the framework for our future trading relationship before we can get down to who owns the house and who pays the mortgage. All we need to know from the start is: will we continue to trade without tariffs and other new barriers or will we trade on the basis of Most Favoured Nation tariffs and non-discrimination under World Trade Organisation rules?

Those are the only two realistic options. By ruling out free movement of labour we have precluded ourselves from joining the European Economic Area (described by the Chancellor as “quite literally, the worst of both worlds”) and we have ruled out remaining within the Common External Tariff since that would preclude us from becoming a beacon of free trade, render the new Department of International Trade otiose and prevent us from helping ‘just about managing’ families by slashing high EU tariffs on food, clothing and other products which we do not produce.

Most UK commentators assume that the EU will want to continue with tariff-free trade. The UK is Europe’s largest export market – larger even than the US with whom they have been laboriously negotiating the removal of tariffs and alignment of standards – both of which we already have. They also have a massive surplus on trade with us. If their prime consideration is the economic well-being of their people, they will not want to impose tariffs on that trade.

However, economic well-being may not be their primary consideration. Europe’s elite may put first the political need to punish Britain, to discourage others from following our example. Faced with a choice between tariff-free trade and trade on a Most Favoured Nation basis they may well opt for the latter. That will cause the EU far more pain than it will cause the UK but they may reason that it is worthwhile as a deterrent. Moreover, whereas it requires at least a qualified majority of EU states to agree to continue free trade, a minority of states or the European Parliament can veto such a deal, which would result in us all moving to the second option.

Britain might prefer the first option – continuing tariff-free trade – if we could have it speedily. But it is ultimately the EU who will decide. The worst possible outcome would be a long period of damaging uncertainty in the hope of a free trade agreement with the EU which then fails to materialise. Britain’s interest is in an early decision. That would end damaging uncertainty and enable us to start negotiating free trade agreements with the rest of the world with whom we do the bulk of our trade. Every week’s delay in leaving costs us £250 million according to the Office of Budget Responsibility figures for our net contribution to the EU.

Above all we must not make the best the enemy of the good. Trading with the EU on Most Favoured Nation terms would still mean the UK is better off than we are at present. Our net contribution to the EU is almost twice the tariff we would pay on our exports to the EU. Moreover, the Treasury would collect £12.3 billion in tariffs on imports from the EU whereas our exporters would pay only £6.5 billion tariffs to continental governments.

So we could compensate any exporters for whom the 15% improvement in competitiveness thanks to the exchange rate movement over the last year is insufficient, and still have billions to cut general taxation. And we can do trade and service deals with the huge, fast-growing but protected markets of Asia, Africa and Latin America. The wording of Article 50 gives powerful support for speeding up the process of leaving. We are in a no lose situation. Bring it on!